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Second Mortgage Foreclosure

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HIGHLIGHTS
  • Understand that your second mortgage holder can foreclose on your home for non-payment.
  • Review why it is possible legally, although not practical economically, for a second mortgage hodler to foreclose.
  • Consider the possible tax implications, if any debt you have is forgiven.

It is possible legally, although not practical economically, for a second mortgagee to foreclose.

If you have a second mortgage which you are not able to pay, you can face foreclosure, whether or not you are paying your first mortgage in full and on time. While your second mortgage holder is in a weaker position, when it comes to collecting from the proceeds of a foreclosure sale, it does not mean that your second mortgage lender will accept non-payment without taking action. Just as with your first mortgage, you need to be concerned with the issues of recourse and non-recourse loans and a deficiency balance, when it comes to considering what kind of obligations you may have after a foreclosure.

The likelihood that your second mortgage holder will initiate a foreclosure depends on your property values and your lender’s ability to collect on a deficiency balance.

Property Values

Given today’s real estate market, where property values have dropped significantly in many areas, many homeowners are upside-down on their mortgages. If you are in a negative equity position, it may be possible legally, although not practical economically, for your second mortgage holder to foreclose and preserve its interests in the property. The first mortgage holder receives any money from a foreclosure before the second mortgage holder. If there is not enough equity in the home to pay off the first mortgage, the second mortgage holder gets nothing in the foreclosure sale.

When a second mortgage holder initiates the foreclosure process, it is responsible for paying off the first mortgage holder’s balance due.  If the sale price of the property would not be enough to pay off the first mortgage balance and any property taxes, then the second mortgage holder would gain no economic benefit from foreclosing.

Deficiency Balance Collectibility 

The ability of the second mortgage holder to collect on a deficiency balance depends on the legal remedies available and your financial position. In some states, such as California, and in some circumstances, your second mortgage may be a non-recourse loan. A non-recourse loan means that the lender has no legal ability to collect any deficiency balance that remains after your property is sold. Its only recourse is the security on the property itself. Most second loans are recourse loans, even in non-recourse states, although it may be a non-recourse loan if you took out the second mortgage and used the funds to purchase your home. If your loan is a non-recourse loan, the second mortgage holder will have no ability to collect on deficiency balance, which reduces the likelihood of the second mortgage holder foreclosing. You will need to review your loan documents and state laws to determine if your second mortgage is a non-recourse loan. Contact an attorney in your state who is experienced in property law to determine if your second mortgage is a recourse or non-recourse loan.

Your financial position is also important.  As we discussed, a second mortgage holder is often reluctant to pursue foreclosure. However, if you have valuable assets or wages that can be garnished, your second mortgage holder will be likelier to aggressively pursue you, if it has the legal ability to do so. The more collectible the deficiency balance is, the greater the chance that your second mortgage holder will foreclose on you.

Possible Payment Solutions

Second mortgage holders often initially take a hard-line stance in negotiations with homeowners in default. You may find it best to liquidate an asset voluntarily, as opposed to facing a wage levy that could cause you great financial havoc.

However, if the lender is convinced that you have no ability to repay the second mortgage and are considering bankruptcy, the lender’s position will soften and consider a lump-sum settlement. Some second mortgagees will settle for 10 to 30 cents on the dollar, depending on the policies of the company.

If collection efforts ensue, negotiate with the creditor in an attempt to reach an out-of-court settlement on the debt. If necessary, enroll the debt in a debt negotiation program. You can to the Bills.com debt relief savings center for a no-cost quote. Another option is to negotiate the debt yourself. 

Summary

If you end up with a deficiency balance, make sure that you understand what kind of financial and tax responsibilities can follow you, even after you lose or sell your home.  If your lender decides to write off the debt, that can create a tax debt for you. Speak with an attorney or a tax specialist, so an expert can explain things to you. The last thing you want is for a problem that you thought was behind you to rear its head with IRS collection notices or a wage levy from a judgment your creditor obtained.

Comments (63)


John D.
Wheeling, IL  |  May 16, 2012
Bills... IL resident Condo purchased in April 2005 for $210,000. 80/20 lender arrangement PHH 1st Mortgage - currently owe $153K TCF 2nd - Home Equity Line of Credit - currently owe $40K Condo last refinanced in Fall 2009 Currently owe $193,000 Assessed at $175,000 in 2009 Condo listed for sale in 2012 for $165,000: Only offer received was an informal verbal offer of $130,000 No longer primary residence due to job change. Rented for last year, costing us $700/month out of pocket beyond our rent income to cover rest of mortgage and assoc dues. Home income just over 70k and been told likely right on the fence about qualifying for bankruptcy. Hard to find someone to speak with who doesn't push an angle (bankruptcy attny, real estate attny, foreclosure litigator) and we feel like there are a lot of options in the realm of possibility but few unbiased people who are willing to look at our situation and give us real advice. Just trying to move forward with our life but feeling paralyzed. Up to date on all payments with good credit as we speak but tenant has left and we want to get out from under this place ASAP as we have moved into a rental in another area and just want to move toward an end with our condo. Your thoughts?
Bills.com
May 17, 2012
John, it seems that you've looked at the likely options, none of which are too attractive. What have you heard from your lenders? What kind of reputation do they have for collecting on deficiency balances? The answers to those questions will influence your decision.

In my view, you should seek a second opinion from another bankruptcy attorney. You need to get a more definitive analysis, so you know what side of the fence you'll end up- the one with your debt discharged or one where you have a five year repayment in a Chapter 13.
Richard A.
Mangonia Park, FL  |  April 04, 2012
This one might be tricky. I purchased my home December of 2002 for $110k. As the market kept going up, I obtained two separate HELOC's from Bank of Amerca that eventually totalled $140k combined. These loans were all obtained without proof of income but I had an 800+ credit score at that time. Long story short, in 2010 I filed Chapter 7 bankruptcy and all loans were included. I am still current on my first mortgage w/ a balance of $98,500 at 6.75%. A few months before I filed bankruptcy, BofA offered (after I hounded them and was late with payments) to reduce my loan balance from $140k to $120k and reduce the interest rate to 0%. I was instructed to mail cashier checks to some odd address (not the address on my old statements that just disappeared) every month and told I would not receive further statements and would not receive receipts. I did this for about 3 months and then stopped as I was uncomfortable with the whole arrangement not even knowing where this money was going. I have not made a payment on the HELOC since November 2010 and have not heard from them at all (maybe due to bankruptcy protection). We do not want to lose our home in foreclosure. I have paid into the loan for nearly 10 years and rebuilt it with my own hands. The current value of the home is around $140k. On my credit report it appears that the HELOC was charged off. All things considered, what are we up against here? Should I hire my bankruptcy attorney to renegotiate with them to reduce the balance due further and accept payments again? Or should we wait until our 3 years is up and have her file to remove the lien? I don't even know if the lien is still there or what is going on. Under no circumstances do we want to face foreclosure. I would really appreciate your insight, Richard
Bills.com
April 04, 2012
The first sentence in your comment is an understatement. I cannot explain the status of your junior loan. Stopping sending your payments to the odd, mystery address was wise, indeed. The fact no one stepped forward to tell you to restart these payments may be telling.

My advice? Involve your lawyer. He or she can conduct research to learn who owns the rights to this loan. If this cannot be determined, then either sit back and wait or ask your lawyer about filing a quiet title action.
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Richard A.
Mangonia Park, FL  |  April 05, 2012
Thank you so much for your quick response. I believe BofA actually owned the HELOC's but after charge-off I would think they sent them to a collection company. I thought maybe they have not contacted me because they are not legally allowed to due to the bankruptcy, but then again when I was a few days late w/ one of my payments to my primary mortgage company they did send out a notice they were just sure to notate that it was for "informational purposes" and noted the bankrupty on the statement...hmmm I don't know. I just hope they are not sitting back b/c they intend to foreclose. I have contacted my attorney to ask for a time to sit down and go over things and I will be sure to ask about the Quiet Title Action. Thanks Much!! Rich
Jesus N.
Bonita, CA  |  February 22, 2012
I bought a condo in 2004 and it went into foreclosure back in 2010 and I had one of those 80% - 20% loans. I refinanced the 20% in 2006 and pull 20k cash to bought a new home which is where I currently live. Now since the Condo went into Foreclosure and sold in 2010 the second lien never contacted me up until now that they want me to pay in full what I owed them. My question is; what options do I have? what would be your best recomendation on how to proceed?
Bills.com
February 23, 2012
The first thing you should do is check and see what type of Anti-Deficiency and Non-Recourse Laws exist in your state. If you are liable for the debt, then you can either negotiate a settlement, wait to be sued, or file bankruptcy. I recommend that you read the Bills.com article about debt relief for more information about your options.
Scottie B.
Lorain, OH  |  January 03, 2012
i have a second mortgages and it is almost impossible for me to keep both mortgages current. What is my best way to get them put together?
Bills.com
January 03, 2012
I don't have enough information to guide you. It is not clear to me whether you have equity in your house. If you do not, then I don't know of a way that you can combine the two mortgages.

If you do have equity, you can look into refinancing to combine them. You said that it is 'almost impossible' to keep your mortgages current. If you have had a number of late payments, refinancing may not be possible. If you have kept things together, but just barely, you may qualify. Lenders will examine your debt-to-income ratio, credit, and loan-to-value.

Look into an FHA loan, if you have less than 20% equity, but at least 3.5%. FHA loans have less stringent credit requirements, too, though you do need to meet income requirements. You can start by contacting one of Bills.com's pre-screened lending partners.
Jodi S.
White Bear Twsp, MN  |  November 03, 2011
Bill - our house went into full foreclosure and was sold 2 1/2 years ago - I do have a home equity loan on the house as well which I have not paid on since we started the foreclosure process which the balance is 90,000 it was with GE and when I called them to make payment arrangements when the whole foreclosure thing started and I was honest with them - they told me there was not reason to make arrangments with them as Wells Fargo was going to get all the money on the sale of the house - since then I have been gettign calles from Specialized Loan Services (which GE sold my loan to them) - they have been calling for 2 1/2 years - do I legally have to pay them? we are trying to proceed with getting a new home and I do not want to be surprised with another bill - please let me know - thanks
Bills.com
November 03, 2011
It would appear by your question that you had a home equity loan which was a recourse loan. If you are in doubt then you should review the loan documents and if necessary contact a lawyer for a legal opinion.

It seems clear that Specialized Loan Services (SLS), believes that you are personally responsible for the loan. You mention getting calls. Has SLS pursued other courses of action? You will not receive a bill, as you already owe the money, however you could be sued which would lead to a judgment. Then, you may be subjected to liens, bank levies and wage garnishments.

Before purchasing another home I recommend that you take out a credit report and review your situation. Are you able to qualify a new loan with an unsatisfied debt of $90,000.?
Patrick G.
C/o N Tonawanda, NY  |  October 25, 2011
Bill I am taking a proerty back deed in lieu of to save a divorcing couple a foreclosure or short sale. Because of the extensive improvements (he is a contractor) & all new appliances I offered them $20,000 to close asap and leave everything behind. (I already have a couple prepared to lease the property). They jumped at it. They were current with their payments & taxes etc. However, the $20,000 cash more than compensates them for all interest payments made for the year. I do not plan to file a 1096C but I feel since I am reimbursing them the $20,000 I should not have to issue a 1098 for mtg interest paid. Am I correct.
Bills.com
October 25, 2011
I do not offer tax advice in situations like the one you described because I never have enough information to make an accurate observation. In other words, it would be really easy for me to give you bad advice that would result in negative consequences for you and the other party.

Consult with a tax lawyer or CPA who can review all of the facts in your situation, and give you precise, tailored advice.
LORNA D.
Raytown, MO  |  October 21, 2011
BILL.COM, Do to illness and loss of job I had to let my home go. I had a first and second on the home. The second I had disability insurance. If I file chapter 7 bankruptcy on the property, will I have obligation to pay the second if the disability insurance pays.
Bills.com
October 23, 2011
Lorna, you should discuss this with a bankruptcy attorney. If you qualify for Chapter 7, I believe that you will have to disclose all your assets. This very well could include the disability policy. An attorney will be able to tell you what kind of bankruptcy you qualify for and whether the money from the disability policy will need to go to your creditors.
William R.
Stuart, FL  |  October 13, 2011
Can a second mortgagee take over the first mortgagee instead of causing foreclosure or bankruptcy problems and costs, perhaps through a quit claim deed or in lieu of foreclosure? Does 2nd have to buy out the first mortgagee's position in all cases?
Bills.com
October 13, 2011
I am uncomfortable with the phrase, "...2nd have to buy out the first mortgagee's position in all cases". The second buying the first's interest is my first thought and the most obvious way for the second to move itself into the first position. However, I imagine there may be circumstances where the first and second trade their interests, perhaps involving several other mortgages where their positions are reversed. Gifting is also a possibility, though unlikely.

Perhaps I lack imagination, but I do not see how a mortgagee could change their rights using a quit claim deed. Customarily, a quit-claim deed is used by a title holder to convey whatever rights they have in real property to another person.
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William R.
Stuart, FL  |  October 13, 2011
Dear Bill Thanx so much for your quick response. perhaps i wasn't clear enough on the circumstances to make my question make sense. yet, your suggestion about "gifting" might be close to the answer i'm looking for.... Here is the circumstances in more detail; I am interested in taking a second mortgage position (owner financing) on a home that i own outright at this time. My buyer agrees to a purchase price of 400K and agrees to obtain a 1st mortgage from another lender for 250K.... i will finance a 2nd note for 125K with a balloon in 4 years... so; in effect he only needs 25K down and we have a sale. I would like to know what my protections are in the event that the buyer can't or won't have the monthly payments for my mortgage, the first mortgage, and the required RE taxes and Insurance.... or perhaps they just let some the payment get in arrears for more than 2 months for any reason. my question; can i write the conditions of my second mortgage so that I can 'assume' the 1st mortgage if i take the aforementioned "quit claim deed" in lieu of going through some sort of bankrupcy or foreclosure procedures (....in effect i would be 'assuming back my own home purchase ' back with the 1st mortgage already in place and the 'buyer' would only forfeit his $25K downpayment and any equity he might have due to principle paydown on the 2 mortgages. (BTW this scenario is agreed to by both myself and the buyer, since he feels it unlikely that he would ever default... but i would like to know if this outcome would be legally possible, just in case it was needed.... perhaps, instead of a quit claim deed, the buyer could "gift" the house over to me with the 1st mortgage still in place? should my buyer make sure that the first mortgage has a "right of assignment" for this to happen easily? ...thanx for your guidance on this.
Bills.com
October 14, 2011
If I understand what you seek correctly, I think you or the buyer will be hard-pressed to find a lender willing to subordinate their rights in the event of a default. Why not ask the borrower to look for a second mortgage, with you already in the first position?

Another option to consider is a land contract, also called an option contract, whereby you agree to sell the property in X months for Y price contingent upon the buyer making consistent and on-time payments of Z dollars.

In general, I encourage buyers and sellers to make creative arrangements to transact land deals. I also encourage people in these situations to hire a lawyer to mediate the transaction. You may think mediation is not necessary in your situation because you and the other party are on friendly terms. A lawyer with real property experience in this situation will not gum-up the works or make a good situation bad, but instead will guide both parties to create a contract everyone understands and likes that handles possible contingencies. A good lawyer may also find a way to help you both save on your tax liabilities.
MARISSA A.
Bonita, CA  |  October 02, 2011
I owe $375,000 on my 1st with CitiMortgage @5.75%. $245,000 on my HELOC with Chase. My home is worth $490,000. I am current on both loans but my husband lost his job and I would like to get the HELOC dismissed or the rate to a fixed rate. A friend told me to stop making payments on the HELOC in order to get them to negotiate with me. Another friend told me to apply for the Home Affordable on the 1st loan and stop payments on the HELOC. Should I pay a representative $4,000 to do all the paperwork for me me and try to negotiate on both my loans??
Bills.com
October 03, 2011
I would first seek help from an organization that does not charge money, before I paid someone $4,000 to assist me. Contact Hope Now, where you can speak about your options, at no cost, with a HUD-approved counselor.

Hope Now also has good information about loan modification scams, which could help you see if the person charging the $4,000 is charging a reasonable or unreasonable fee for the work it says it can do and whether you can reasonably expect that the work you may pay for would produce tangible results.
Tom L.
Queen Valley, AZ  |  September 10, 2011
Bill, We are at the tail end of our chapter 7 bankruptcy and have a 1st ($330,000) that is paid current and a 2nd ($50,000 line of credit lien) with Indie Mac. The 2nd was not paid during BK as we were advised it would be stripped. It is in the chargeoff dept and we have just sent our hardship package. We have other family on our street and are scared to death to lose our home. We are trying to settle while we are in BK, which will be discharged any day. We are offering $4,000 as my husband just lost his job and we had to use up our savings due to a previous job loss. We are current on the 1st and plan to keep that paid. What is your advise and do you think they will foreclose?? Thank you. Tom
Bills.com
September 12, 2011
Consult with your bankruptcy lawyer immediately about your negotiations with the second. You really want to make certain that a) negotiating with the second is necessary, and if so, b) you do not accidentally reinstate your liability for the loan.
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